KCG Holdings Suspects Its Property Was Used by Executive Who Left — Sources

Scott Patterson, Jenny Strasburg and Michael Rothfeld broke the news that the Manhattan district attorney’s office was investigating a possible computer code-theft at KCG Holdings. The district attorney’s office is looking into whether a former technology executive stole the code from the trading firm and used it to benefit a rival, according to sources.

The story as it appeared on Dow Jones:
June 3, 2014, 7:34 PM EDT: KCG Holdings Suspects Its Trading Code Was Stolen

7:34 PM EDT: KCG Holdings Suspects Its Property Was Used by Executive Who Left — Sources

7:34 PM EDT: KCG Holdings Suspects Its Trading Code Was Stolen

By Scott Patterson, Jenny Strasburg and Michael Rothfeld

The Manhattan district attorney’s office is investigating whether a former technology executive stole computer code from a high-profile trading firm and used it to benefit a rival, according to people briefed on the probe.

At issue is a firm’s computer code–closely guarded systems software and trading algorithms that determine how orders to buy and sell securities navigate the market’s complex infrastructure. Trading code can help determine a firm’s success or failure and has been, at times, a focus of intrigue.

Code-theft cases have proliferated as global banks and sophisticated trading firms seek to protect the technology that drives their operations.

Lawyers for the New Jersey-based trading firm, KCG Holdings Inc., told Manhattan prosecutors they suspected KCG’s intellectual property was improperly being used elsewhere, the people briefed on the probe said, prompting the investigation. KCG was formed last year from the merger between Knight Capital Group Inc. and Getco Holding Co.

A former technology executive at Knight, Raymond Ross, is a focus of the investigation, according to one of the people briefed on the probe, which is in early stages. Prosecutors are examining communications, computer records and other information from KCG and elsewhere, this person said.

In an interview, Mr. Ross, chief technology officer of New York-based Clearpool Group, called any suggestion that he or any of his colleagues stole code or any Knight property “outrageous.”

“We haven’t taken any intellectual property. I personally have not and don’t have knowledge of anyone else who has,” Mr. Ross said. He said he and others at the firm hadn’t gotten inquiries from KCG or prosecutors about claims that code was stolen.

“Clearpool will vigorously fight these false claims and launch a countersuit against those responsible,” a company spokesman said.

KCG “is committed to safeguarding the integrity of the firm’s intellectual property and cooperates fully with criminal and regulatory authorities,” a KCG spokeswoman said.

Federal and New York prosecutors have taken on code-theft cases with mixed results. The Manhattan district attorney’s office has several pending code-theft cases, including one against Sergey Aleynikov, who is charged with stealing high-frequency-trading code from Goldman Sachs Group Inc.

Unlawful duplication of computer-related material is a felony that in New York carries a maximum prison sentence of four years, according to the state penal code.

Mr. Ross left Knight early last year. Soon after, he joined a firm that later helped launch a trading and market-technology firm called Clearpool Group, according to regulatory filings, his LinkedIn profile and the firm’s website.

Since then, Clearpool has held meetings with banks, brokerages and exchanges regarding its planned operations, which include handling orders for private trading firms and other clients.

Clearpool executives said the firm has about 10 ex-Knight employees, including former executives, or roughly one-fourth of the new firm’s staff.

Knight’s former chief executive and chairman, Thomas Joyce, is an adviser to Clearpool Group. Mr. Joyce said he had no knowledge of any investigation related to KCG and Clearpool and declined to comment further.

In May, Joseph Wald, who formerly oversaw Knight’s market-access business known as Knight Direct, became chief executive of Clearpool Execution Services, a regulated brokerage arm of the firm. He also is an adviser to Clearpool Group.

Mr. Wald said Clearpool isn’t aware of an investigation into potential code theft. “There is absolutely nothing to” the allegations, he said in an interview.

No one involved in the probe has been accused of any wrongdoing, and there is no indication, according to one of the people briefed on the probe, that investigators are examining the activities of Messrs. Joyce or Wald.

In August 2012, a computer error at Knight triggered a $461 million trading loss, a debacle that led to Knight’s merger last year with Getco, forming KCG.

Some of Clearpool’s owners also have stakes in World Trade Financial Group, a company with offices in New York and Montreal that helps stock traders connect to exchanges and other trading venues, according to its website.

Clearpool executives are working to develop tools that will help World Trade and other trading platforms manage risks and prohibit potentially manipulative orders by their trading clients from entering the market, according to the executives and others who have spoken to them about their plans.

Mr. Wald said he and other executives don’t view Clearpool as a direct competitor to KCG. However, Clearpool executives have described their plans to executives at other firms as similar, in part, to Knight Direct, which is now part of KCG, according to people involved in those conversations.

Messrs. Ross and Wald said in an interview that they plan to have Clearpool Execution Services handling client orders in the next month or so and plan to seek status as an alternative trading system, a regulated trading venue competing with banks, exchanges and other trading firms to match buy and sell orders.

A big Clearpool client is expected to be World Trade, according to firm executives. The Journal reported last month that an affiliate of World Trade was notified by Credit Suisse Group AG, which provided it direct stock-market access, that it would no longer provide that service to several firms including the World Trade affiliate due to concerns about possible manipulative trading routed through the firms.

The Financial Industry Regulatory Authority, Wall Street’s self-regulator, has been examining whether traders at, or clients of, World Trade and other firms have engaged in manipulative activity, according to people familiar with the inquiry.

World Trade declined to comment on the Credit Suisse and Finra matters.

Write to Scott Patterson at scott.patterson@wsj.com, Jenny Strasburg at jenny.strasburg@wsj.com and Michael Rothfeld at michael.rothfeld@wsj.com

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